The amount of incentives being offered by landlords to secure tenants means prime office space is now cheaper than it was a decade ago, according to new research.
Although headline rents are higher than they were in 2000 – currently around £28 per sq foot, as opposed to £24 per sq ft ten years ago – the amount of rent-free incentives on offer means landlords are receiving less income for their space.
According to CB Richard Ellis’ ‘Net Effective Rental Analysis’, if you factor in rent-free periods, landlords of Grade A office space in Birmingham are now achieving around £16 per sq ft over an initial five year term for their premises.
In net effective terms, that’s around 50p less than ten years ago, and £12 less than in 2007, when the market was at its peak and prior to the credit crunch.
Ashley Hancox, the Birmingham-based head of regional office space at CBRE, believes that the gap between headline rents and the net effective rent is the widest it has been since 2000.
He said: “There is a gulf of around £11.50 between what landlords are asking for and what they are genuinely getting. It’s all in the small print.
“With rent-free periods of two to three years now typical on a ten year lease, in reality landlords are discounting their headline rents by 20 per cent plus.”
However, Ashley predicts the space between headline rents and net effective rents will soon begin to close.
“It’s no secret that the city’s supply of Grade A space is dwindling, and with no development pipeline to speak of, a handful of significant deals will quickly change this.
“Landlords will be in a position to offer fewer incentives.
“The next two or three major occupiers to take up space in the city will benefit from this historically low net effective rent, and those who hold out will unfortunately lose out.”
This window of opportunity is not exclusive to new occupiers. Alan Klein, who heads CBRE’s lease consultancy team, has helped tenants shave up to 50 per cent off their occupation costs in the last year.
He said: “Incumbent tenants in the fortunate position of facing a lease event and who wish to remain in their existing premises are taking the chance to re-gear their lease.
“If they are confident enough to extend their lease, say for five years, they can end up with the equivalent of a year’s rent free – a welcome cash injection into their business in these challenging times.”